New Study Suggests Online Lenders Target Vulnerable Consumers

The Federal Reserve Bank of Cleveland issued new research on the online lending market showing that borrowers end up in more debt than consumers who don’t utilize this method of borrowing.

According to a news report in American Banker covering the study published last week, the Cleveland Fed said it found consumers who take out loans via the internet, either from a peer-to-peer lender or via a marketplace, likely could have utilized a traditional bank. That flies in the face of research earlier this year from the Philadelphia Fed and Chicago Fed, which found that online lenders primarily serve consumers who can't get loans from banks.

“We are scratching our heads,” Nathaniel Hoopes, executive director of the Marketplace Lending Association, an industry trade group, said in an email to American Banker about the research. “The Philadelphia and Chicago Federal Reserve recently conducted a more granular study and reached the opposite conclusion as this Cleveland Fed research."

The Cleveland Fed also found that online lenders aren’t going after markets underserved by banks, and “resemble predatory loans in terms of the segment of the consumer market they serve and their impact on consumers’ finances.”

The researchers used data from TransUnion for the study, pinpointing 90,000 borrowers who took out online loans from 2007 to 2012. The study found consumers who took out the loans saw their debt grow by around 35 percent more during the course of the next two years, compared to those who did not take out the loans. In addition, those who borrowed online had lower credit scores, more accounts that were past due and more total debt outstanding two years later compared to those who didn’t borrow money online.

Yuliya Demyanyk, a Cleveland Fed economist who co-authored the research, told American Banker that those who apply for online loans are also getting credit from the traditional banking system at the same. “They’re not underbanked, they’re sort of overbanked,” she said.

Critics of the report said the study doesn’t separate the different type of lenders on the internet, which go after different consumers and charge different interest rates.



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